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IMF: back from the dead

Jayati Ghosh — Mon, 23 Nov 2009 16:44:00 GMT

The International Monetary Fund (IMF) has definitely had a very good crisis. Just over a year ago, it was an institution on life support: ignored by most developing countries; derided for its failure to predict most crises in emerging markets and its often counterproductive responses to such crises; even called to book by its auditors for poor management of its own funds!

Its policy prescriptions were widely perceived to be rigid and unimaginative, applying a uniform approach to very different economies and contexts. They were also completely outdated even in theoretical terms, based on economic models and principles that have been refuted not only by more sophisticated heterodox analyses but also by further developments within neoclassical theory.

Illustration: Jayachandran / Mint

The 1990s and early 2000s were particularly bad for the organization: Its economists and policy advisers got practically everything wrong in all the emerging market crises they were called upon to deal with, from Thailand and South Korea to Turkey to Argentina. In situations in which the crisis had been caused by private profligacy, they called for larger fiscal surpluses; faced with crisis-induced asset deflation, they emphasized high interest rates and tight money policies; to address downward economic spirals, they demanded fiscal contraction through reductions in public spending.

The countries that recovered clearly did so despite IMF’s advice or, in several cases, because they actively pursued different policies. IMF loans were seen as “too expensive” because of the terrible policy conditions that came with them. So returning IMF loans early became something of a fashion, led by some Latin American countries.

More recently, an even more terrible fate has befallen IMF: that of increasing irrelevance. From 2002 onwards, IMF, along with the World Bank, became a net recipient of funds from developing countries, as repayments far exceeded fresh loans. The developing world turned its attention to dealing with private debt and bond markets, which is where the action was. Less developed countries found new sources of aid, finance and private investment, as China, South-East Asia and even India to a limited extent began investing in other developing countries.

In this sorry situation, the global financial and economic crisis has come as real manna from heaven for IMF. Suddenly, its own pathetic record at predicting, assessing and intervening in crises was forgotten in the general financial pandemonium that was unleashed after the collapse of Lehman Brothers in September 2008.

Subsequently, the G-20 (which set itself up as the guardian of the global economy, bypassing more potentially democratic structures such as the United Nations) decided to give IMF an extraordinary tonic in the form of additional pledges of funds, with the mandate to provide funds to developing and emerging markets that had been hit by an international crisis not of their own making. This gift of additional resources and power did not even require any democratization of the fund’s governance structure, which is still controlled by the US (and to a lesser extent, Europe) to a degree unwarranted by the current composition of world trade, or any change in its policy conditionalities.

So IMF is now back in business, with a slew of supposedly new schemes to deal with countries in crisis. It is amazing that the multiple failures of IMF are being thus rewarded. This is, after all, the organization that failed to predict the collapse of the US subprime market, announced that the medium-term financial outlook for Iceland was exceptionally healthy just months before the country was declared effectively bankrupt, and succeeded in making things much worse in most of the countries where it forced its austerity measures in return for paltry loans.

What is even more disastrous is that IMF seems to have learnt only partially from the current crisis— and what is has learnt is applied only through blatant double standards. There is one rule for industrial countries in crisis, no matter how irresponsible the run-up to the crisis; and another rule for developing countries, even the most prudent and fiscally “disciplined” of them.

Thus, IMF, in its flagship publication World Economic Outlook, argues for countercyclical macroeconomic policies to counter the recession in the US and Western Europe. Developing countries and transition economies in distress, however, apparently cannot afford such luxury. They must follow the standard prescriptions of monetary tightening and fiscal contraction to deal with a crisis created by the fall in exports and flight of capital caused by the crisis in the US.

So the countries that have been unfortunate enough to require IMF support in the current crisis have found that they have to cut public spending and generate negative multiplier effects in economies in which output and employment have already been ravaged. Ukraine, Pakistan and Latvia, for example, have all been told to cut government spending and raise interest rates and user charges for government services in the middle of the downswing, in return for IMF loans.

Even when IMF accepts that this is a heavily procyclical policy that causes a financial crisis to spread to the real economy and create a sharp downswing, that is seen as just too bad; this is, after all, the “right” medicine for such countries and the necessary pain must be gone through for eventual recovery.

The problem is that this argument was wrong before and is still wrong. These IMF conditionalities do more than inflict major pain on the people of the countries they are applied in; they also do not result in economic recovery. If only a little bit of IMF’s restructuring medicine could be applied to the institution itself.

Jayati Ghosh is professor of economics at the Centre for Economic Studies and Planning, School of Social Sciences, at Jawaharlal Nehru University, New Delhi. Comment at theirview@livemint.com

Dr Singh goes to Washington

Harsh V. Pant — Sun, 22 Nov 2009 15:47:00 GMT

Indian Prime Minister Manmohan Singh visits Washington, DC, as the first state guest of the Obama presidency on 24 November. Obama was in Asia recently on a nine-day tour, which took him to Japan, Singapore, South Korea and China. This is a time of mounting domestic challenges for Obama. Yet his visit to Asia was intended to underline the significance with which the changing global balance of power is being viewed in Washington. And China is at the centre of this global reordering so, not surprisingly, a lot of attention was focused on Obama’s trip to China. The ground reality in the Asia-Pacific region is changing rather rapidly, and questions have arisen about whether the Obama administration has a strategy towards the region at all.

China’s growing economic and political clout was on display when, in its early days, the Obama administration toyed with the idea of a G-2, a global condominium of the US and China, whereby China can be expected to look after and “manage” the Asia-Pacific. When this elicited strong, negative reactions from the US allies in the region, the US decided to change its course. The talk then turned to a G-3—a forum that would bring the US, China and Japan together this month for the first time. This was primarily aimed at pacifying Japan, which had felt marginalized by the growing coziness between the US and China. But now, it is Washington’s turn to feel isolated at the growing camaraderie between Beijing and Tokyo.

Illustration: Jayachandran / Mint

Sino-US ties are now being described by a new phrase, “strategic reassurance”. The US will not attempt to interfere with China’s rise in the international system, and China will cooperate with the US in dealing with major global concerns, thereby easing concerns in Washington about China’s intentions. Obama has described China as a “vital partner, as well as a competitor”, warning of “enormous strains” in US-China ties if economic imbalances between them go uncorrected for long. Beijing, for its part, remains concerned about the direction of US trade policy after the US slapped tariffs on Chinese tyres and steel pipes, even as other Asian countries also harbour doubts about Obama’s commitment to free trade. Obama got nothing of substance from the Chinese, even as he tried to project the image of a US that was more conciliatory than ever in dealing with the Middle Kingdom. It was clear to everyone that Washington was now dealing with a Beijing that was more ready to push back against the West than it has ever been. There were no major breakthroughs as Obama not only failed to get Chinese support for sanctions against Iran but also failed to address global concerns about China’s currency manipulation. The Communist Party succeeded in stage-managing Obama’s public appearances. Deferring to his Chinese hosts, Obama didn’t even hold a news conference in China. Meanwhile, he did his best to acknowledge China’s rise as a global power and was laudatory about China’s global role without touching on contentious issues such as human rights.

Then came the joint statement, which has led to alarm bells ringing in New Delhi. According to the Sino-US joint statement, “the two sides are ready to strengthen communication, dialogue and cooperation on issues related to South Asia and work together to promote peace, stability and development in that region”. Days before the Indian Prime Minister is visiting Washington, Obama is in effect underlining India’s role as a mere regional power on a par with Pakistan, while elevating China’s role in South Asia. This is in stark contrast to the Bush administration which wooed India as a rising power, viewing it as a pole in the emerging global balance of power. Acknowledging India as the primary actor in South Asia, de-hyphenated from Pakistan, gave India what it had long desired—a de facto status as a nuclear weapon state. Now under Obama, India is back to being seen as a problem state that requires outside support to solve its problems.

While the US and China have every right to discuss South Asia in their bilateral discussions, India should make it clear to Washington that Beijing is part of the problem in South Asia and there is no role for China in the region. By supporting Pakistan’s nuclear and conventional military programmes despite its global commitments, China is merely interested in ensuring parity between a rising India and increasingly decrepit Pakistan, so that India will not be able to break out as a global power capable of challenging China’s pre-eminence in Asia and beyond.

It is inevitable that America’s Asia policy will change in the coming years, as it cannot remain isolated from global and regional trends. The US’ policy will have to move beyond the traditional post-Cold War understanding of Asian regional order. Obama’s trip has done little to assuage the concerns of Chinese neighbours who would like a more assertive US to balance China. The outcome of Obama’s visit might convince the world that it’s the Chinese who are now calling the shots in the Sino-US relationship. It is in this rapidly evolving strategic context that India will have to fashion its approach towards the US. The present trajectory of Sino-US ties should make India revisit some of its foreign policy assumptions so that it can hold firm in defence of its core national interests.

Harsh V. Pant teaches at King’s College London and is currently a visiting professor at IIM, Bangalore. Comments are welcome at theirview@livemint.com

Preventing money laundering

Arpinder Singh and K.V. Karthik — Thu, 19 Nov 2009 16:03:00 GMT

Recent coverage on the Madhu Koda case has hogged the limelight. According to newspaper reports, the Enforcement Directorate (ED) has lodged a case under the Prevention of Money Laundering Act (PMLA) against Koda and three former ministers as well as his associates Vinod Sinha and Sanjay Chaudhary.

So who is Koda and what is the case all about? Koda is a former chief minister of Jharkhand and is alleged to have amassed wealth beyond his known sources of income. Some estimates put the amount of money laundered by Koda and associates at more than Rs4,000 crore—almost one-fifth of the annual budget of the state he once governed.

Illustration: Jayachandran / Mint

Koda allegedly was in touch with two individuals in Mumbai, Sinha and Chaudhary, both of whom incidentally are natives of Jharkhand. Till just five years ago, Sinha used to be a milk vendor while Chaudhary’s father used to sell tobacco products on a cycle. During Koda’s tenure as chief minister, Sinha swiftly managed to procure property at different locations in Jharkhand and Jamshedpur, an iron sponge mill, a rolling mill, collectively valued at more than Rs200 crore. Investigators allege this was all Koda’s money being invested in Sinha’s name. Sinha is also reported to have deposited as much as Rs20 crore on several occasions in a Jamshedpur bank. Also, payment for the much-talked-about mine bought in Liberia was allegedly made in cash by Koda.

People familiar with the matter in ED also allege that Sinha was involved in investing and routing Koda’s money through illegal or hawala channels. The income-tax (I-T) department has uncovered illegal transactions worth Rs2,500 crore, including Rs550 crore sent to foreign nations such as Dubai, Thailand and Malaysia, among others.

Politicians illegally pilfering public money may not be new, but an incident of such magnitude has jolted everyone. PMLA was enacted specifically to curb money laundering, which begets the question: Is there weakness in our anti-money laundering (AML) regulations? In India, politically exposed person (PEPs) are defined as individuals who are or have been entrusted with prominent public functions in a foreign country, such as heads of states or government, senior politicians, government/judicial/military officers or senior executives of state-owned corporations.

PEPs are considered high-risk under most AML regulations; the reason is that the law assumes that PEPs in general represent a potential risk for corruption and bribery, given their position and contacts. Surprisingly, most jurisdictions, including India, prescribe increased scrutiny of politicians of foreign origin, but are silent on local politicians.

This case hopefully should provide an impetus for India to include domestic politicians as high-risk and demand that financial institutions undertake enhanced due diligence (EDD) on them.

One other factor that has escaped attention is the role of financial institutions in effectively implementing AML guidelines. How did banks allow transfer of high-value funds through their accounts without raising a red flag? According to newspaper reports, one branch of a bank in Mumbai failed to inform about transactions worth more than Rs900 crore by one of the group companies owned by Koda’s frontman. All financial institutions need to maintain a profile of their customers, including high-risk customers, and also identify details of all known sources of wealth. Any transaction mismatch with the profile of the customer should be investigated thoroughly. Thus, the bank owes an explanation as to how someone who used to be a milk vendor till a few years back could amass so much wealth.

Mere implementation of a transaction monitoring system is not the solution. An information technology solution is just an enabler and banks need to have proper policies and procedures in place to identify suspicious transactions. In case some transactions occurred before the implementation of their AML I-T solutions, banks need to conduct a transaction look-back exercise to identify suspicious transactions from the past and investigate them proactively. Further, financial institutions should revisit their AML policies/procedures and enhance their EDD process to include identification of beneficiaries of each account. This would also enable identification of any person associated with PEPs who would then need to be considered as high-risk.

India is a large cash economy. With the earlier incident of the display of cash in Parliament and current allegations of payment in cash for buying mines and to Bollywood personalities, it is important for competent authorities to find a remedy to this malaise sooner. A good starting point would be to expand banking services (especially to rural India) and encourage use of cashless services through channels such as cheques and credits cards. This will enable the regulatory agencies to monitor transactions effectively.

Is this case likely to have an impact on the impending Financial Action Task Force (FATF) review of India’s case for membership? A good starting point would be to re-think and expand the scope of designated non-financial businesses and professions under the AML regulations as there are certain professions in India that are recommended by FATF but not yet covered by AML regulations such as real estate agents. While it is evident that the AML regime in India has enough checks and balances in the system to identify potential cases of money laundering, what is needed is stringent implementation of these policies by the regulated entities in letter and spirit.

Arpinder Singh is executive director and K.V. Karthik is associate director, both at forensic services, KPMG. Comments are welcome at theirview@livemint.com

A tale of two economies

Nouriel Roubini — Wed, 18 Nov 2009 16:04:00 GMT

While the US recently reported 3.5% gross domestic product (GDP) growth in the third quarter, suggesting that the most severe recession since the Great Depression is over, the US economy is actually much weaker than official data suggest. But official measures of GDP may grossly overstate growth in the economy as they don’t capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply. Third quarter GDP—properly corrected for these factors—may have been 2% rather than 3.5%.

The story of the US is, indeed, one of two economies. There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn.

Illustration: Jayachandran / Mint

Consider the following facts. While the US’ official unemployment rate is already 10.2%, the figure jumps to a whopping 17.5% when discouraged workers and partially employed workers are included. And, while data from firms suggest that job losses in the last three months were around 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest that those losses were above two million.

Moreover, the total effect on labour income—the product of jobs times hours worked times average hourly wages—has been more severe than that implied by the job losses alone, because many firms are cutting their workers’ hours, placing them on furlough, or lowering their wages as a way to share the pain.

Many of the lost jobs—in construction, finance and outsourced manufacturing and services—are gone forever, and recent studies suggest that a quarter of US jobs can be fully outsourced over time to other countries. Thus, a growing proportion of the workforce—often below the radar screen of official statistics—is losing hope of finding gainful employment, while the unemployment rate (especially for poor, unskilled workers) will remain high for a much longer period of time than in previous recessions.

Consider also the credit markets. Prime borrowers with good credit scores and investment-grade firms are not experiencing a credit crunch at this point, as the former have access to mortgages and consumer credit while the latter have access to bond and equity markets.

But non-prime borrowers— about one-third of US households —do not have much access to mortgages and credit cards. They live from pay cheque to pay cheque—often a shrinking pay cheque, owing to the decline in hourly wages and hours worked. And the credit crunch for non-investment-grade firms and smaller firms, which rely mostly on access to bank loans rather than capital markets, is still severe.

Or consider bankruptcies and defaults by households and firms. Larger firms—even those with large debt problems—can refinance their excessive liabilities in court or out of court; but an unprecedented number of small businesses are going bankrupt. The same holds for households, with millions of weaker and poorer borrowers defaulting on mortgages, credit cards, auto loans, student loans and other forms of consumer credit.

Consider also what is happening to private consumption and retail sales. Recent monthly figures suggest a pickup in retail sales. But, because the official statistics capture mostly sales by larger retailers and exclude the fall in sales by hundreds of thousands of smaller stores and businesses that have failed, consumption looks better than it really is.

And, while higher-income and wealthier households have a buffer of savings to smooth consumption and avoid having to increase savings, most lower-income households must save more, as banks and other lenders cut back on home-equity loans and lower limits on credit cards. As a result, the household savings rate has risen from zero to 4% of disposable income. But it must rise further, to 8%, in order to reduce the high leverage of household sector.

To be sure, the US government is increasing its budget deficits to put a floor under demand. But most state and local governments that have experienced a collapse in tax revenues must sharply retrench spending by firing policemen, teachers and firefighters while also cutting welfare benefits and social services for the poor. Many state and local governments in poorer regions of the country are at risk of bankruptcy unless the federal government undertakes a massive bailout of their finances.

Moreover, income and wealth inequality is rising again: Poorer households are at greater risk of unemployment, falling wages or reductions in hours worked, all leading to lower labour income, whereas on Wall Street, outrageous bonuses have returned with a vengeance. With the stock market rising while home prices are still falling, the wealthy are becoming richer, while the middle class and the poor—whose main wealth is a home rather than equities—are becoming poorer and being saddled with an unsustainable debt burden.

So, while the US may technically be close to the end of a severe recession, most of America is facing a near-depression. Little wonder, then, that few Americans believe that what walks like a duck and quacks like a duck is actually the phoenix of recovery.

Nouriel Roubini is professor of economics at the Stern School of Business at New York University and chairman of Roubini Global Economics (www.roubini.com). Comments are welcome at theirview@livemint.com

It’s time to downgrade WPI

Vivek Moorthy and Sunil B. Shankar — Tue, 17 Nov 2009 15:45:00 GMT

The first set of data using the new monthly Wholesale Price Index (WPI) for October, replacing the weekly series, was released on Friday. The long-recommended move to the new monthly series has met with approval from many commentators and analysts. The rationale for this change is that weekly inflation data is noisy and may end up distorting policy decisions. The new monthly data is expected to reduce volatility—in both measured inflation and in the response of markets to that data. To begin with, it definitely makes sense to replace weekly with monthly inflation, whatever the series. No question.

Also See Highs and Lows in WPI Inflation (Graphics)

With regard to the markets, moving to monthly data will reduce noise trading. Financial markets always want more data, since that generates more trading activity. The monthly report will “remove a source of market volatility”, as chief statistician Pronab Sen stated in Mint (7 November). However, unless securities transaction and similar (Tobin type) taxes are imposed to discourage socially undesirable high-frequency trading, the markets will find something else to trade on. Taxes on trading can be imposed in a revenue-neutral manner. The revenues can be used to finance socially desirable expenditure such as the National Rural Employment Guarantee Act and similar schemes—instead of allowing these expenditures to bloat the deficit and harm the economy, as has been the case.

However, the more important issue is not whether the new WPI will significantly reduce market volatility, but whether it will reduce volatility in inflation. A detailed examination of existing WPI data indicates that most of the volatility is across months, not intra-month. The accompanying Table documents the intra- (fiscal) year highs and lows for WPI using both monthly and weekly data. The monthly WPI level used here is the last week’s observation for that month (every month having four and occasionally five weeks of data), not the average monthly value. As can be seen from the Table, if we compare the highs and lows for the year in the monthly series with that in the underlying weekly series, there is hardly any difference. The weekly series is just a bit more volatile. Judging from the timing of the highs and lows in WPI, one can conclude that much of the variation in WPI inflation arises from shocks to the price level that last for several months at least. For instance, due to the hike in the administered price of petroleum products, WPI rose above 12% in July 2008. In other words, the major volatility in WPI inflation has been intra-year for different months, not intra-month for different weeks.

The real improvements in data collection and their use in policy need to be in a different direction. The Consumer Price Index (CPI)—used as “the” measure of inflation across the world—must replace WPI. By contrast, the policymakers here claim to look at all measures, but WPI is clearly paramount. On several occasions this year, the Reserve Bank of India and others have stated, without generally specifying which precise measure, that inflation is expected to rise to about 5% by early 2010. Clearly, the default reference to inflation is to WPI, since CPI has been well above 5% over the last year and more.

The heavy reliance on WPI in formulating monetary policy at present partly rests on a misunderstanding of the consequences of the failure of direct inflation targeting, or DIT. Whether or not a country follows DIT, CPI should still be paramount. Good monetary policy needs to both control inflation and stabilize output. The well-known Taylor rule sets the federal funds rate based on both inflation (with typically a 2% CPI target or equivalent) and the ratio of actual to potential real output, or the related output gap. In India, WPI inflation is closely correlated with the output ratio, since the bulk of it is manufacturing products. So when the economy is weak, WPI inflation tends to fall a lot, unlike CPI.

A single-minded focus on CPI, as in a DIT policy, would clearly have been disastrous in recent months. It would have led to tightening in late 2008 when industry was down in the dumps, and early this year, when WPI was falling sharply, although CPI was high and rising. To its credit, RBI did not do so. However, it does not follow that policy should respond to WPI. When there is weakness in the economy that warrants monetary easing, that weakness can be captured by the output gap term in a Taylor-rule type policy, which also takes into account CPI inflation. Insofar as there are difficulties in measuring the output gap in real time, it can be proxied by some statistic based on industrial production data. The need for monetary policy to also stabilize output does not imply that WPI should be used in monetary policy.

The recent proposed changes in data collection and the switch to monthly reporting of WPI are welcome and overdue. However, choosing the right price index is far more important than the frequency of measuring inflation. Improving upon the wrong measure of inflation (WPI) will tend to delay the switch to the right measure (CPI). Unfortunately, India is the only country that does not give primacy to CPI. The justifications offered for not doing so are flimsy and need to be discussed separately.

Graphics by Ahmed Raza Khan / Mint

Vivek Moorthy is professor of economics at IIM, Bangalore, and Sunil B. Shankar is a research associate, also at IIM, Bangalore. Comments are welcome at theirview@livemint.com

Environmental confessions

Manju Menon and Kanchi Kohli — Mon, 16 Nov 2009 17:35:00 GMT

Many truths about the working of the ministry of environment and forests (MoEF) have been revealed by minister Jairam Ramesh. These have also led to some critical changes in the work culture of the ministry, such as greater transparency. We don’t mean to be uncharitable to the officers who have always had the time and inclination to talk to people about what ails the system, but it seems now that the ministry has finally called itself the problem. A discussion note that was put up on its website on 17 September states that the ministry’s current mechanisms have failed to achieve environment protection over the years.

Illustration: Jayachandran / Mint

This confession of sorts has been welcomed by many who have worked on environmental issues and by those who have accused the ministry of being biased, unfit and dead. What seems to be the icing on the cake is that the ministry accepts that somebody else might be better equipped to do part of the job it has done all these years. The proposal by the ministry to relinquish some of its duties to an independent National Environment Protection Authority (NEPA) has been hailed as progressive.

MoEF proposes to hold the duties of drafting policies and laws to participate in international negotiations and carry out environment education programmes. The implementation of the existing environment regulatory frameworks such as the Environment Impact Assessment (EIA) Notification, 2006, or the Coastal Regulation Zone (CRZ) Notification, 1991, and also the functions of MoEF’s regional offices and pollution control boards (PCBs) are up for offer to NEPA. What this simply means is that NEPA will be responsible for the grant of environment clearances to development and industrial projects, and ensuring the monitoring as well as compliance of all the conditions levied as part of the clearance.

As confessions are meant to do, the ministry has earned itself some guiltless sleep while we are left to think of what to make of this new proposal. Our sleep has been particularly disturbed as the discussion note is based on an incomplete reading of our recent report on the staggering levels of non-compliance of environmental clearance conditions by projects under MoEF’s supervision.

The ministry’s discussion note begins by stating that we have good laws but have failed to implement them adequately on account of institutional incapacities. Such ahistorical views are not useful and also dangerous. The 14 amendments to the EIA notification since 1994 and the 21 amendments to the CRZ notification since 1991, most of which were in the interests of project investors and proponents, seem to have been forgotten. In fact, implementation has suffered because illegalities under earlier versions of the law have been legalized by subsequent amendments. The example of how EIA 2006 came about is illustrative. A much-needed review of EIA 1994 was undertaken between 2000 and 2004 with the purpose of relieving the “bottlenecks” caused by environment clearance procedures. It was not the quality of environmental decision-making that was the concern of the review, but the time delays caused to investors.

A logical outcome of incorporating this concern into the new EIA framework has been that the annual number of clearances granted has shot up. The expert appraisal committees, technical bodies that are meant to assess environmental information about projects before recommending clearance, are expected to move papers of 80-100 projects within two meeting days every month. Poverty of qualitative decisions has been designed by our environment laws.

A fallacious framework for environmental decision-making that has rendered the ministry incapable of playing its role will also force poor decisions out of any new authority. Along with the legacy of a faulty environment clearance regime, NEPA will also inherit the responsibility of monitoring the compliance of at least 6,000 projects that have been cleared using the prevalent legal procedures.

If the ministry carefully examines its 25 years of experience as the institution meant to deliver qualitative environmental decisions and ensure compliance, it will see that complexities lie at deeper levels. What is the environment? Is it what the scientist studies, what the industrialist/investor wants to harness, what the farmer or fisherman lives by, or what the tiger and elephant need? Who or what affects it and causes problems, and therefore, who or what is to be regulated to protect the environment—and how? Questions such as these have to be democratically addressed if we are to build an environmental governance framework for a country such as ours with its abundant cultures and contesting aspirations for environmental security and economic growth.

The minister’s hurried offer to hand over critical decision-making functions to an independent authority before engaging with the above questions seems to have little to do with environment protection. While it will relieve the ministry of controversies surrounding clearances, it does not guarantee better environmental decisions. More importantly, those suffering environmental impacts will not have a minister to pin down to the hot seat.

Manju Menon and Kanchi Kohli are members of Kalpavriksh Environment Action Group. Comments are welcome at theirview@livemint.com

The folly of GDP predictions

Madan Sabnavis — Sun, 15 Nov 2009 15:33:00 GMT

Think of any variable and you will realize that its number is amenable to forecasting. Earlier, macroeconomic forecasts used to be accompanied by shoulder shrugs but today, there is a sense of finality as strong econometric models back them. Hence, we have a wide array of such forecasts provided by different agencies and, not surprisingly, the final number is quite different. All of which prompts confusion, and perhaps even imprudent decision-making.

Also See A Gross Margin of Error

Let us look at the forecast for gross domestic product (GDP) growth for India today. The Reserve Bank of India (RBI) put out a forecast of 6% for 2009-10 on 27 October, which was lower by 0.5 percentage point from what the Prime Minister’s economic advisory council had predicted a week before. Subsequently, the Planning Commission upped its own forecast from 6% to 6.5%. The International Monetary Fund (IMF) says 5.4%, the Asian Development Bank says 6.0%, the World Bank says 5.1%, the Organisation for Economic Co-operation and Development says 5.9%, the Indian Council for Research on International Economic Relations says 5.8-6.1%, while the National Council of Applied Economic Research says 7.2%.

So the range of forecasts is between 5.1% and 7.2%; quite clearly, the actual number will lie somewhere in between. All will claim, when the actual GDP figures are out, that they missed it by a certain margin. However, in monetary terms, this margin is substantial. India’s real GDP in 2008-09 was around Rs36.1 trillion. A variation of 1% in the forecast would actually mean around Rs36,000 crore (in constant terms). That amount is too large to be simply waved as a statistical error. Can we then choose the best forecast?

The answer is that it is inherently very difficult to gauge how the economy will behave by the end of the year.

First, we need to distinguish between statistical forecasts and targets. If it is the former, then we have a problem because when we have to forecast GDP, we have to take a call on agriculture, industry and services, which is a tough one. How do we know the behaviour of the monsoon in April or the performance of the rabi crop? Also, industrial growth is whimsical and dependent on agriculture. Further, around 40% of the service sector output comes from the unorganized sector—transport, hotels, retail trade, real estate—subject to varied imputations, thanks to lack of recorded data, and hence difficult to conjecture.

Econometric models use past data; but this is very unreliable because the performance of any sector is based on current conditions such as the monsoon, crop damage, government spending and so on. The variables that determine the forecast are themselves subject to forecasts, which make the entire process prone to error. Rough GDP scenarios are better hedges, but are not precise.

One can instead sit back and say: Agriculture accounts for around 20% of GDP and will show a growth of 2%; industry, with 20% of GDP, will grow by 8%; services, with 60%, by 8%—and then simply arrive at a GDP growth rate of 6.8%, which will not be far off from the final number!

Hence, pragmatically, it makes more sense to talk of GDP targeting instead, which governments should do. Ideally, they should target growth of, say, 7% and align policies for the same. They can then scale this target based on changing circumstances.

Second, we should remember that there are just too many imponderables during a year. Besides the varied domestic factors mentioned above, globalization has increased the shock effect of unknown variables—or the epsilons in econometrics jargon. Oil prices rising or falling, a war, the US Federal Reserve’s rate changes, housing boom and carry trade are some events which affect our economy indirectly through the trade and capital flow routes.

Third, this plethora of estimates is confusing, even though they are theoretically sound. Rarely does an estimator always get the number right, which means that the reader will never know which is the best estimate. So what is the reader to believe?

Curiously, IMF—which uses some of the most sophisticated models—also goes off the mark most of the time (see table). Based on the World Bank’s estimates of GDP in 2008, the world economy was sized at $60 trillion. A deviation of 0.1% of GDP here means going off the mark by $60 billion. The euro economy going off the mark by 0.7 percentage point means a $95 billion change! As can be seen in the table, the 2008 estimates were quite out of line, while 2007 was only marginally better.

So what are we to make of such statistical exercises in India? In general, RBI has been closer to the mark. Global agencies tend to be pessimistic, while agencies that try to “sell” India are usually optimistic. Politicians are overly sanguine when they take a call for future years, especially if the present looks cloudy.

But here’s the rub: Taking business decisions based on forecasts could upset the apple cart. Over-sanguine or over-gloomy forecasts could prompt over- or under-investment. So, even after businesses overcome the confusion of deciding whose estimate to rely on, they could be hurt when they realize that the estimate was far from reliable.

So while governments should consider targets, the average businessperson is best off glancing at one of these myriad forecasts, and then probably doing nothing about it.

Madan Sabnavis is chief economist, NCDEX Ltd. Views expressed here are personal. Comment at theirview@livemint.com

For a universal idea of health

Madhukar Angur — Thu, 12 Nov 2009 19:45:00 GMT

After countless attempts over nearly a century, the US House of Representatives made history by approving a sweeping healthcare reform Bill on 7 November, backing the biggest health policy changes in four decades and handing US President Barack Obama a crucial victory. The battle over healthcare now moves to the US Senate.

Also See What Medicine The US Needs (click here)

The US is one of the most technologically advanced countries in medicine and research. Yet, it has the highest cost of healthcare in the world ($8,160 per person annually), and is ranked 37th in the world in overall healthcare.

In 2009, 16% of Americans are uninsured; as the unemployment rate rises, the number of uninsured rises as well. Many employers have drastically reduced their healthcare plans for employees. Only 60% of employers are providing health benefits for full-time employees. So what is the best option for providing effective health insurances to all US citizens? And how does the public option—where the state pays for all the uninsured—fare in the analysis?

A comparison study of the US and seven other countries, both developing and developed, found that the US is the only country without a public option. The study conducted by the Social Systems Research Institute in Michigan, US, compared the average cost of healthcare per person; average life expectancy, infant mortality rate, HIV/AIDS prevalence rate, and availability of public and/or private health insurance options. Switzerland spends $3,857 per person per year; with Canada spending $3,678 per person; England, $1,675; Mexico, $800; and India, $9.20 each year; compared with $8,160 in the US. The US average life expectancy is 78.11 years, coming in third lowest among the countries studied, just above Mexico and India (see Table).

One of the wealthiest countries in the world, the US also reports the third highest infant mortality rate at 6.3 deaths per 1,000 live births, and the highest HIV/AIDS prevalence rate (0.60%). Yet, the patient-doctor ratio in the US is 390:1, compared with 470:1 in Canada, 440:1 in England and 1,700:1 in India.

Considering these findings, the US fares poorly overall on these parameters. One primary reason for the overall US healthcare system’s low ranking is that Americans do not want or cannot share the costs of medical treatment.

Like in several countries, many people deliberately choose not to receive treatment, either from a physician or emergency care, or purchase prescription medication because they cannot afford it. A large US population is lacking medical education in sexually transmitted diseases, diabetes, heart disease and other life-threatening illnesses. Many patients affected by these illnesses often try to manage their healthcare themselves, potentially leading to health complications or even death. For these reasons and many others, a public option seems viable for the US.

Obama’s recommended public option, known as the Federal Employees Health Benefits Program, will require $10 billion over the next five years to implement. It is estimated that this will drive costs down by nearly $77 billion by 2015. It will become a national health insurance exchange for those who don’t have insurance, a one-stop shopping market for healthcare. Any private insurance company could offer a plan in the exchange if it adheres to defined standards.

The exchange is sure to affect the health industry, by actually causing fierce competition among health insurance providers. As a government-run insurance plan, the exchange won’t have to make a profit or pay a chief executive’s salary. It will also have lower administrative costs: Currently, administrative costs in private insurance are at least twice those in the programmes run by the US government.

The exchange would also offer incentives for quality and use its bargaining power to achieve lower costs. As a result, savings would be passed on as lower premiums, forcing private insurance companies to compete on those terms or lose customers.

Let’s compare with India, which has a wide variety of socioeconomic settings, and where national health programmes have been designed with enough flexibility to permit state public health administrators to craft their own packages according to their needs.

The revised objective of India’s National Health Policy (NHP), instituted in 2002, is to achieve an acceptable standard of good health among the general population of the country by 2015.

NHP suggests that the Indian Systems of Medicine and Homoeopathy (ISMH) are necessary to initiate measures to enable each system of medicine to develop in accordance with its own genius. Simultaneously, NHP suggests that planned efforts should be made to integrate their services, especially the meaningful, phased integration of ISMH with modern medicine. NHP also outlines the need to secure complete integration of all plans for health and human development, particularly agriculture and food products, rural development, education and social welfare, housing, and water supply and sanitation.

In many places, ISMH continue to be widely used due to their accessibility and, sometimes, because they offer the only kind of medicine within the physical and financial reach of the patient. Such a typically Indian system of medicine is also embedded in the beliefs of a wide section of the public.

So, what can the US learn from India’s NHP? The US should adapt the systemic integration programme that India is implementing. This would integrate current medicinal research and technology.

Currently, variations in the public option are being debated in the US. Regardless of the type, a public option is better than no public option at all. Once implemented, it could reduce annual individual healthcare by as much as $2,500 a year. It is time for the US to choose well on behalf of its citizens and their health.

Graphics by Ahmed Raza Khan / Mint

Madhukar Angur is a distinguished professor of marketing, Flint School of Management, University of Michigan and honorary dean, Alliance Business School, Bangalore. Comments are welcome at theirview@livemint.com

China’s climate condition

Aileen Ionescu-Somers — Wed, 11 Nov 2009 15:17:00 GMT

On 22 September, Chinese President Hu Jintao announced at the UN climate summit in New York that his country would increase its efforts to improve energy efficiency and curb the inexorable rise in carbon dioxide emissions. His words were not accompanied by figures, an essential prerequisite for a “cool deal” at the critical Copenhagen climate change conference in December, which will review and hopefully revamp the Kyoto Protocol.

The Kyoto Protocol is the result of a multi-actor decision-making process that implies the innovation of entire business systems and the emergence of new regulatory frameworks on a global level. One of the many problems with the current protocol is that while developed countries are aiming for a 5% reduction below 1990 levels by 2012, developing countries have no restrictions. To a great extent, this is because developed countries are largely responsible for the problem. However, given the level of accelerated economic development in India and China over the last decade, it is essential to get these countries to the negotiating table and to take responsibility for curbing their harmful emissions.

Photo: Natalie Behring / Bloomberg

So how is China positioned to actually back up words with action and take the giant step required? Research carried out by IMD’s forum for corporate sustainability management (CSM), a learning initiative involving a membership of global companies, throws considerable light on the readiness of Chinese companies to confront the challenge of climate change.

CSM carried out a study together with the University of Science and Technology of China six years ago on perceptions of Chinese environmental managers on the state of environmental management and managerial awareness of environmental threats. While Chinese managers admitted their companies’ significant environmental impacts, they felt that economic and employment factors were impeding progress in environmental performance. Inadequate environmental awareness among mainstream managers was prevalent, and a lack of technical expertise prevented integration of environmental criteria into processes along value creation chains. Furthermore, management development practices were not evolving rapidly to alleviate these factors. There was considerable ambiguity around regulatory enforcement owing to multiple factors: protectionism, job threats, and not enough enforcement personnel. A general “laissez faire” attitude to environmental compliance prevailed, often due to feelings of inertia and powerlessness because of economic and political barriers to progress.

Since 2003, when the research ended, climate change has taken centre stage as one of the most prominent sustainability issues.

In 2008, CSM worked on the World Wide Fund for Nature (WWF)’s Climate Savers partnership strategy, producing a case that can be used for learning in IMD’s mainstream programmes. Climate Savers is a group of firms that came together in 2000 from multiple industries and that focuses on establishing emission inventories and reduction targets certified by a third party.

However, by 2008, WWF had a problem. While the Climate Savers had set themselves relatively aggressive targets and had achieved them, the volume of effort was far too low to make a real difference and not enough companies were following the leaders.

Few Chinese companies are first movers or leaders in the area of climate change. This does not mean that there are none; another IMD/CSM research project on sustainable supply chains which ended in 2006 showed that, in developing economies in particular, new and up-and-coming companies can take opportunities to virtually “leapfrog” technologies relative to longer established US and European firms that find themselves hanging on to old technology and running down their assets for longer than is good for the climate change dilemma.

But because of the systemic problems that IMD had identified in the Chinese business context, WWF is increasingly concerned that companies there will not move fast enough to a clean economy. Large, state-owned Chinese companies dominate not only Chinese industry but in some cases even the world economic stage, depending on the industry. State-owned companies tend to be even less proactive than privately owned ones in introducing technology or carrying out a profound rethink of business systems.

Will Chinese companies be capable and willing to apply and commercialize technologies that can stabilize climate change on a vast enough scale? We contend that in China, the additional layers of complexity in the business environment compared with, for example, the already complex European or US business environment will slow things more substantially than any of us would like.

Even in the developed world, global companies tend to opt for cautious incremental improvements in carbon saving as a response to this challenge. While this is definitely better than nothing, more radical processes and product innovations are still scarce.

In China, changing businesspeople’s mindsets, filling substantial knowledge gaps among managers and enforcing legislation will be even more formidable challenges than they already are in Europe and the US.

Aileen Ionescu-Somers is deputy director, forum for corporate sustainability management, IMD, Switzerland. Comments are welcome at theirview@livemint.com

Free expression for democracy

Christopher Lingle — Tue, 10 Nov 2009 15:15:00 GMT

Freedom of expression is one of the most important cornerstones of a free and open society. Guarantees of freedom of expression allow citizens to learn about mistakes of the powerful and help reveal corruption at all levels.

This freedom must be protected, even if large sacrifices are required, since it aids in the formation and operation of “civil society” for citizens to have a voice against abuse of power. These organizations include universities, the media, NGOs and other associations of free people that wish to have their individual and collective views heard.

Illustration: Jayachandran / Mint

Unfortunately, grave threats are being raised that could seriously undermine freedom of expression. Unfortunately, elements of civil society have been mute in the face of this truly menacing threat.

Governments and international organizations are taking steps to limit free speech by insisting on limiting “hateful” speech or to criminalizing remarks that some might find blasphemous. With regard to this latter end, the UN Human Rights Council unanimously passed a resolution to codify exceptions to free speech involving “negative racial and religious stereotyping”.

While this restriction of “objectionable” speech has no direct enforcement, the end result is that religious sensitivities are clearly being privileged over rights of free expression.

As suggested above, elements of civil society that should champion free speech are either in retreat or asleep at the helm. Perhaps the most troubling acquiescence to attempts to mute the freedom of expression is seen in the academy.

In a bizarre twist, Yale University Press will publish The Cartoons That Shook the World by Jytte Klausen but will not republish the cartoons that the book is written about. The offending cartoons depicted Prophet Muhammad and appeared in a Danish newspaper, Jyllands-Posten, in 2005. In turn, a small fringe of Muslim radicals responded by engaging in numerous lawless and violent acts.

It beggars belief that professors at Yale and elsewhere did not protest this ridiculous turn of events. Adding injury to insult, former UK prime minister Tony Blair, currently offering a course at Yale, stated support for censoring historical depictions of Muhammad, including the noted cartoons. Even America’s “newspaper of record”, The New York Times, refused to reproduce the cartoons when they initially appeared.

Taking steps to promote religious “tolerance” by imposing intolerance and criminalizing individuals to challenge the values of others is akin to “destroying a village to save it”. Since international human rights law aims to protect individual believers rather than systems of belief, the focus should be on violations of free expression instead of “abuses” of that right.

As it is, freedom of speech is about protecting those with views that go against the majority or to question their most cherished institutions. As such, it is a matter of patriotism that Americans wilfully accept that others burn their flag and Christians steel themselves against insults to their faith.

As a professional academic, I have a long record as an outspoken critic of both communism and socialism such that I spent much of my career engaged in heated debates with Marxists. Yet my right to criticize them depends upon communists and socialists being able to preach their (deeply flawed) ideas. Their right to express themselves must be protected even if history makes it evident that their credo is dangerous as evident in the millions that died at the hand of Mao and Stalin or Pol Pot.

In fact, I have been personally targeted for speaking out against suppression of the right to speak freely. While a university lecturer in South Africa, I criticized the logic of a group claiming to speak for the local Islamic community that sought to block a visit from Salman Rushdie and to ban his book, The Satanic Verses. My published remarks pointed out that their freedom to propagate their faith depended upon Rushdie’s freedom to offend. Rather than engage me in open debate, I was on the receiving ends of numerous threatening phone calls.

Not long after that, an organization that I was a member of in good standing debated whether to ban me from attending their conference because of my association with a South African university. It mattered not to the supporters of the proposition that I was an American citizen with a solid record as a vocal critic of apartheid.

The argument that won the day then is relevant now. People who entrust their beliefs in foolish or flawed ideas should be encouraged to voice them.

By airing ideas in a wide public forum, the implausibility of defective ideals will become evident to all. Perhaps even to their proponents! Don’t shout them down; let them shout their stupidity from the rooftops.

People who are secure in their beliefs and feel that they can withstand outside scrutiny or criticism should not feel threatened by others who challenge their views. Mark Twain expressed a sensible view against limiting free speech to avoid offending others, in saying: “The easy confidence with which I know another man’s religion is folly teaches me to suspect that my own is also.”

Christopher Lingle is a research scholar at the Centre for Civil Society in New Delhi and visiting professor of economics at Universidad Francisco Marroquin in Guatemala. Comment at theirview@livemint.com

Climate change and fairness

Vijay R. Joshi — Mon, 09 Nov 2009 15:25:00 GMT

There is now a growing consensus among governments that aggressive climate change mitigation would be desirable, though they remain bitterly divided about how the associated burden should be shared between advanced and developing countries.

Fair distribution of the cost of mitigation is important on moral grounds and for obtaining universal participation. But the concept of ideal fairness is highly controversial, and philosophers have debated it for centuries. Progress in the pivotal climate change negotiations in Copenhagen will require the adoption of a non-ideal but acceptable notion of fairness that could bridge differences in negotiating positions.

Image: StockXpert

Developing countries have two different lines of argument about fair burden sharing. The first concerns “historic responsibility” for the accumulated stock of carbon emitted by the developed economies. These advanced countries have used up a large part of the safe carbon-absorbing capacity of the atmosphere and should, therefore, compensate the developing countries for this “expropriation”. This is a persuasive point. Even so, it runs up against some powerful moral intuitions. The rich countries did not expropriate knowingly. They acted in the belief, universally held until quite recently, that the atmosphere was an infinite resource. Moreover, the “expropriators” are mostly dead and gone. Their descendants, even if they could be identified, cannot be held responsible for acts they did not themselves commit. These points do not entirely overturn “historic responsibility” since developed economies benefit hugely from their past carbon-intensive industrialization. Even so, the extenuating factors alluded to above surely count to reduce the fair liability of the advanced countries.

The second line of argument advocated by the developing countries concerns the fair distribution of the burden of reducing the future flow of carbon emissions. Suppose overall global emissions are controlled by issuing tradable carbon permits. The developing countries argue that the permits should be allocated on a population or per capita income basis. The rationale of the former is rights-based. Each human being has an equal right to use global carbon space. The rationale of the latter is egalitarian; permits should be given to the very poor because they are very poor. Both these principles imply that most of the permits should be given to developing economies. This is because these countries contain most of the world’s people as well as most of the world’s poor. The trouble is, however, that the above principles are not generally accepted in international relations. There is no agreement that natural resources should be equally shared. Why should the atmosphere be any different? Nor is there any enthusiasm about stringent egalitarian obligations. Foreign aid has never reached even half the UN target of seven-tenths of 1% of advanced countries’ gross domestic product.

The way out of this maze is to focus on a principle that is widely accepted as a minimal requirement of fairness. The principle is simply “do no harm”.

In the climate change context, doing no harm means that developing economies should be enabled to reduce their cost of mitigation to zero until they have eliminated abject poverty. In practical terms, this would imply allocating enough tradable carbon permits to poor countries to allow them to maintain the growth of their living standards along the business-as-usual path, say, for the next two decades (two decades is an average. The time horizon would be less for China and longer for Africa). After that time, developing countries’ permit allocations would be progressively reduced. Climate models are capable of calculating the requisite time path of permit allocations. (So far, I have assumed that the instrument of mitigation is tradable permits. Alternatively, a worldwide carbon tax could be adopted. In addition, carbon-saving technology could be transferred, when it becomes available. This makes no essential difference to the above argument. There would have to be a revenue or technology transfer to developing economies of an amount sufficient to reduce their cost of mitigation to zero for a defined period.)

The no-harm approach to burden sharing has many desirable features. It takes some account of “historic responsibility”. This is because a significant portion of the damage inflicted by the accumulated large stock of carbon consists of raising the cost of future mitigation for all countries. In the no-harm scheme, however, developing countries’ mitigation costs would be covered for a defined period.

The scheme also takes some account of rights-based and egalitarian arguments by skewing the allocation of permits towards poorer countries, which would result in a significant financial transfer to them, unlike an allocation of permits based on current emissions, which would strongly favour the advanced countries. But the transfer to the developing countries would not go beyond offsetting the welfare cost of mitigation policies for an agreed length of time. This would be more acceptable to the governments and citizens of advanced countries than distributing permits on a population or per capita income basis, which would result in much larger annual financial transfers to developing countries, several times larger than foreign aid flows today.

The stakes in climate change are so high that inflexible bargaining positions would be a recipe for disaster. The “no harm” principle could provide the basis for an acceptable scheme, since it would go some way towards meeting the concerns of all negotiating parties.

Published with permission from VoXEU.org. Edited excerpts. Vijay R. Joshi is a fellow of St John’s College, Oxford, and emeritus fellow of Merton College, Oxford. Comment at theirview@livemint.com

As the Wall fell, Asia rose

Brahma Chellaney — Sun, 08 Nov 2009 15:37:00 GMT

On its 20th anniversary, the fall of the Berlin Wall stands out as the most momentous event in post-World War II history. By triggering the end of the Cold War and the collapse of the Soviet Union, it helped transform global geopolitics. It also set in motion developments that helped significantly raise Asia’s profile in international relations, with the two demographic titans—China and India—benefiting in important but different ways.

Globally, some nations lost out, but many others gained. The events arising from the Berlin Wall’s fall transformed Europe’s political and military landscape. But no continent benefited more than Asia, as has been epitomized by its dramatic economic rise—the speed and scale of which has no parallel in world history.

Illustration: Jayachandran / Mint

At a time when tectonic global power shifts are challenging strategic stability, Asia has become the world’s main creditor and economic locomotive. With the world’s fastest growing markets, fastest rising military expenditures and most volatile hot spots, a resurgent Asia today holds the key to the future global order. The Asian economic renaissance has been accompanied by a growing international recognition of Asia’s soft power, as symbolized by its arts, fashion and cuisine. Even so, Asia faces complex security, energy and developmental challenges in this era of globalization and greater interstate competition.

An important post-1989 development was the shift from the primacy of military power to a greater role for economic power in shaping international geopolitics. That helped promote not only an economic boom in Asia, but also led to an eastward movement of global power and influence, with Asia emerging as an important player on the world stage.

Global power shifts, as symbolized by Asia’s ascent, are now being spurred not by military triumphs or geopolitical realignments but by a factor unique to our contemporary world—rapid economic growth. Rapid economic growth also was witnessed during the Industrial Revolution and in the post-World War II period. But in the post-Cold War period, rapid economic growth by itself has contributed to qualitatively altering global power equations. So, economic power is now playing a unique role in instigating contemporary power shifts, even as the United Nations Security Council’s permanent-membership structure continues to undergird the importance of military power.

Another defining event in 1989 was the Tiananmen Square massacre of pro-democracy protesters in Beijing. But for the end of the Cold War, the West would not have let China off the hook over those killings.

The Cold War’s end, however, facilitated the West’s pragmatic approach to shun trade sanctions and help integrate China with global institutions through the liberalizing influence of foreign investment and trade. Had the US and its allies pursued the opposite approach centred on punitive sanctions, like they are still doing against Cuba and Myanmar, the result would have been a less-prosperous, less-open and a potentially destabilizing China.

China’s phenomenal economic success—illustrated by its emergence with the world’s biggest trade surplus, largest foreign currency reserves and highest steel production—thus owes a lot to the West’s decision not to sustain trade sanctions after Tiananmen Square. Without the expansion in US-China trade and financial relations, China’s growth would have been much harder. Today, having vaulted past Germany to become the world’s biggest exporter, China is set to displace Japan as the world’s No. 2 economy. Yet, for the foreseeable future, Japan—with its nearly $5 trillion economy, impressive high-technology skills, Asia’s largest navy and a per capita income more than 10 times that of China—is likely to stay a strong nation.

India’s rise as a new economic giant also is linked to the post-1989 events. India was so much into barter trade with the Soviet Union and its communist allies in Eastern Europe that when the Eastern bloc began to unravel, India had to start paying for imports in harsh cash. That rapidly depleted its modest foreign exchange reserves, triggering a severe balance of payments crisis in 1991. The financial crisis, in turn, compelled India to embark on radical economic reforms, which laid the foundation for India’s economic rise.

More broadly, the emblematic defeat of Marxism in 1989 allowed Asian countries, including China and India, to overtly pursue capitalist policies. Although China’s economic modernization programme already had begun under the leadership of Deng Xiaoping, the Chinese Communist Party, after 1989, was able to publicly subordinate ideology to wealth creation. That example, in turn, had a constructive influence on surviving communist parties in Asia and beyond.

Geopolitically, too, post-1989 gains extended far beyond the West. China and India were both beneficiaries. For China, the Soviet Union’s sudden collapse came as a great strategic boon, eliminating a menacing empire and opening the way to rapidly increase strategic space globally. Russia’s decline in the 1990s became China’s gain.

For India, the end of the Cold War also triggered a foreign policy crisis by eliminating the country’s most reliable partner, the Soviet Union. But as in the economic realm, that crisis had a positive outcome: It led to a revamped foreign policy.

The crisis compelled India to overcome its didactically quixotic traditions and inject greater realism and pragmatism into its foreign policy—a process still on. After the Cold War, India began pursuing mutually beneficial strategic partnerships with all key players in Asia and the wider world, including European powers and Japan. The new Indo-US “global strategic partnership”—a defining feature of this decade—was made possible by the post-1989 shifts in Indian policy thinking.

As India has moved from Jawaharlal Nehru’s non-alignment to a contemporary, globalized practicality, it is becoming multi-aligned, while tilting more towards the West. But it intends to preserve the core element of non-alignment—strategic autonomy. A multi-aligned India pursuing omni-directional cooperation for mutual benefit with key players, clearly, is better positioned to advance its interests in the changed world.

In that light, it is hardly a surprise that Russia remains India’s “tried and tested friend”—a relationship whose value for both sides is being reinforced by the China factor. In contrast, the escalating India-China rivalry and tensions over the Himalayan territorial disputes run counter to the US interest to build closer ties with both sides and not to overtly side with New Delhi. It is not an accident that Washington, locked in deepening symbiosis with Beijing, is today quietly charting a course of tacit neutrality on the Arunachal dispute.

To be sure, not all developments after 1989 were positive. For instance, the phenomenon of failing states, which has affected Asian security the most, is a direct consequence of the end of the Cold War. While the Cold War raged, weak states were propped up by one bloc or the other. But with the disappearance of the Soviet Union, the US got out of that game.

That is the reason why, suddenly, dysfunctional or failing states emerged in the 1990s—a phenomenon that has since contributed to making such nations a threat to regional and international security because they are home to transnational pirates (Somalia) or transnational terrorists (Pakistan and Afghanistan), or they defy global norms (such as North Korea and Iran). Asia has suffered more casualties from the post-Cold War rise of international terrorism than any other region.

Between 1988 and 1990, as the Cold War was winding down, pro-democracy protests broke out in several parts of the world—from China and Myanmar to Eastern Europe. The protests helped spread political freedoms in Eastern Europe and inspired popular movements elsewhere that overturned dictatorships in countries as disparate as Indonesia, South Korea, Taiwan and Chile. After the Soviet disintegration, even Russia emerged as a credible candidate for democratic reform.

Although the overthrow of a number of totalitarian or autocratic regimes did shift the global balance of power in favour of democratic forces, not all the pro-democracy movements were successful. Indeed, the subsequent “colour revolutions” only instilled greater caution among the surviving authoritarian regimes, prompting them to set up measures to counter foreign-inspired democratization initiatives.

Two decades after the fall of the Berlin Wall, the spread of democracy has unmistakably stalled. Aside from the feared retreat of democracy in Russia, China—now the world’s oldest and largest autocracy—is demonstrating that when authoritarianism is deeply entrenched, a marketplace of goods and services can stymie the marketplace of political ideas. A new model, authoritarian capitalism—now well established in Asian countries as different as Singapore, Malaysia and Kazakhstan—has emerged as the leading challenger to the international spread of democratic values.

Brahma Chellaney is professor of strategic studies at the Centre for Policy Research in New Delhi. Comments are welcome at theirview@livemint.com

Caught in a crossfire of ideas

Rajni Bakshi — Thu, 05 Nov 2009 15:22:00 GMT

A recent meeting organized by the Citizens Initiative for Peace at Constitution Club in New Delhi was widely reported as a gathering of human rights activists, former judges, senior academics and at least one former member of the Rajya Sabha. But a few businesspeople also attended. They came to learn about different aspects of the Naxal-Maoist insurgency and the government’s counter-insurgency operations.

They heard retired Supreme Court judge P.B. Sawant appealing to the Union and state governments to honour the most basic constitutional mandate—to guarantee the right to life. Hundreds of thousands of people are being denied this fundamental right, justice Sawant said, by both the insurgents and the government’s paramilitary forces.

Photo: Mustafa Quraishi / AP

The most moving narrative was that of Himanshu Kumar, founder of the Vanvasi Chetna Ashram in Chhattisgarh, which was demolished by the police in May.

Why are the police acting against a group working in the Gandhian tradition of constructive work? This question bothers a wide range of people at the top of India’s social and economic totem pole. Businesspeople have their own sad experiences with arbitrary government behaviour. But on this issue, they are caught in a bind.

Many of their friends and colleagues say, “Maoists are terrorists, they must be defeated regardless of collateral damage.” Gurcharan Das, a former corporate chief, recently wrote a column saying “enough is enough”, and lamenting that the government is slowed by the endless debate on “whether helicopters should fire on rebels and risk civilian casualties”.

If enough businesspeople actively support this view, or even remain silent, then they will help make true Arundhati Roy’s accusation that Indian democracy is a sham, a pretence to impress the outside world.

But what about those of us who want to make democracy work, and passionately disagree with both Das’ prescription and Roy’s sweeping dismissal of Indian democracy?

We know that Indian democracy is woefully inadequate and regularly fails the poor and the deprived. But we also acknowledge what gains it has made and nourish it as a work in progress.

So it is vital to unravel just what is at stake here and to consider why reluctance to take a public stand could be fatal for all of us.

One, we must acknowledge that there are bitter class conflicts in our society. Accepting this will not willy-nilly force us into the company of those who believe that class war is both inevitable and desirable. There are other ways to ensure equity, greater fairness and justice.

What caught one businessman’s ear, in the meeting at Constitution Club, were the narratives of people who have been serially brutalized by feudal landlords, operations of private companies and governments. These victims have not joined the Maoists and instead have fought to enforce constitutional rights. But now these people, struggling to make democracy work, are being put in the same dock as Maoists or Maoist sympathizers.

Two, we need to stand up against opposite forms of debilitating political correctness. In the boardrooms and dinner parties of the business community, blanket condemnation of the insurgency and everyone in its vicinity has become a must.

On the other side, many human rights groups may condemn Naxal-Maoist violence, but are unable to categorically oppose their politics. They treat the Maoist insurgency as an inevitable, even necessary, response to centuries of oppression. In doing so, they ignore the successes of other kinds of mass movements that have overcome exploitation in different parts of the world, including India.

This approach suits those in government and the private sector, who want to paint all resistance on the ground with the same brush. But there is a crucial difference between the Maoist and the tribal, who has no interest in class war but is simply refusing to be displaced by a company that wants the minerals beneath her hut or under the sacred groves of her ancestors.

It is that tribal who is physically caught in the crossfire. But all those committed to deepening Indian democracy are morally much more on the line. Without sufficient energy behind our conviction, we will, by default, empower the purveyors of “class war”. And they could be Maoists or elected representatives or private players—anyone who extracts their own benefit at the cost of equity and democratic rights.

So what can we do? We could start by being seen and heard together in public. Joint fact-finding and action involving leaders of the private sector, social activists, academics and bureaucrats could play a historic role.

We could seek answers to some basic questions:

• What is the extent of displacement where people are being evicted without adequate compensation and rehabilitation?

• What new business models would create win-win situations for people, the environment and business?

Some companies have gained, financially and socially, by respecting local people’s right to say “no”. Why are such examples not being highlighted and replicated in India?

This proposal may seem naïve at a time when veritable war clouds are hovering overhead. But a deeper examination will show that these are all achievable goals. Certainly, silent withdrawal is not a solution. And the trigger-happy “enough is enough” approach, with its unconditional support of the government, is lethal for both democracy and shared prosperity.

Rajni Bakshi is the author of Bazaars, Conversations and Freedom: For a Market Culture Beyond Greed and Fear. Comments are welcome at theirview@livemint.com

Comparing India and China

Nick Schulz — Wed, 04 Nov 2009 15:52:00 GMT

Comparing the relative strengths of India and China is a time-honoured parlour game. Which nation can grow faster? Which will be the more important power in the 21st century? Which one has a better model for growth?

After China’s dramatic Olympic showcase and its ability to get its economy growing quickly after the global financial downturn, many have wondered if China has the jump on India today.

Illustration: Jayachandran / Mint

But courtesy of an innovative London-based think tank, we have a comprehensive way of comparing India and China—one that is far more useful and comprehensive than anything that has come before it—and the results might surprise some readers.

The Legatum Institute recently released its 2009 Prosperity Index (you can find the results at www.prosperity.org). The purpose of the index is to be able to compare and contrast countries against benchmarks that best reflect the richness and variety of what matters most in people’s lives.

In this index, economic growth and performance matter a lot. But they are not the whole story and not the sum total of what it means to be prosperous. The folks at Legatum understand that while man needs bread to live, and economic growth is indispensable for seeing to it that man has bread to eat, man does not live on bread alone.

And so they compiled an index that ranks countries according to several criteria that are based not just on economic wealth but quality of life issues as well. In other words, it is a measure of overall well-being in an effort to include those elements that make a people not just rich but happy, healthy and free as well. These include economic fundamentals, entrepreneurship and innovation, democratic institutions, education, health, safety and security, governance, personal freedom and social capital.

And as it turns out, India is doing far better than its neighbour to the north-east, ranking 30 places higher than China on the overall global index. Both countries still have large populations of very poor people, so they are much lower down in the rankings than the countries of western Europe and North America, for example. But India ranks 45th on the index while China is far down at 75. China even ranks below pariah state Venezuela.

What accounts for the differences?

Ryan Streeter, a fellow at the Legatum Institute, tells me that “India beats China solidly owing to the way that its governance contributes to the economy. That is the democratic institutions index, where India is 36 and China 100. Couple that with other key measures of governance, freedom and social capital—social capital is amazingly high in India, which is ranked fifth in the world—and India is far more prosperous than its rival”.

The social capital component is especially interesting. “Indian citizens report high levels of membership in community organizations, allowing for a broad network of social capital,” the report concludes.

Indians seem to be like Americans in this respect. When Alexis de Tocqueville published his magisterial account of the American experiment, Democracy in America, he was struck by the high degree of social capital he observed during his travels. Americans were a nation of joiners, he witnessed. Indians seem to be similar in that regard—indeed, Indians are even ahead of the US on this metric, which ranks two spots behind, at seventh, in the world. And the report’s authors note that high levels of social capital are needed to bolster human happiness.

My colleague at the American Enterprise Institute Roger Bate notes that “China outperforms India in both of the main economic sub-indices because it provides greater economic certainty to investors, receiving far more foreign investment than India. Still, the overall index implies that trouble is brewing for China as it loses out to India in all other sub-indices, especially in its lack of democracy and personal freedom”.

Indeed, on my visits to India, I am always struck at how vibrant Indian democracy is and how robustly pervasive the sense of personal freedom is. There is a rowdy, even chaotic, spirit in India that is refreshing and lively and is the hallmark of a free people enjoying their rights and liberties.

There are, of course, areas in which India needs to make significant progress. Education, health, and safety and security are all areas in which India’s performance is badly lagging much of the rest of the world.

But the overall picture is quite encouraging. And in this version of the India versus China parlour game, we must tip our cap to India.

Nick Schulz is editor, American. com, and co-author of From Poverty to Prosperity (Encounter, 2009). Comments are welcome at theirview@livemint.com

The case for private money

Sauvik Chakraverti — Tue, 03 Nov 2009 15:28:00 GMT

Marxists wrongly assert that capitalism is all about “private ownership of the means of production”. All these machines and factories are nothing but capital—and the fundamental aspect of capitalism, which goes deeper than property in machinery, is private ownership and superintendence of capital itself. This is something individuals produce for themselves, through production, exchange, saving and investing. It is private ownership and superintendence of these individual savings that lies at the root of capitalism. This is what capital is all about. And the word “capital” is a word that indicates something of supreme importance—as in “capital city” or “capital punishment”.

Image: StockXpert

Now, it becomes immediately obvious that a socialized, centralized and state-owned and -directed fiat money and banking system is nothing but communism in thin disguise. All our savings are made available to the political needs of the state. All our private capital is denominated in fiat money, as are all our commercial dealings. In every exchange that transpires on the market, one part of that exchange is state money. And this is money of extremely poor quality, deteriorating in value with every passing day. Inflationism means “capital consumption”—the destruction of savings. This means that what is actually happening under this communistic ownership and superintendence of our capital is that capital is being consumed, being eroded, being malinvested and being wasted. In other words, we are hastening down the road towards “decivilization”.

Indeed, the progress of civilization always involves not capital consumption, but capital accumulation. With progress, we save more, providing for our future, our old age, and even for our children and grandchildren. These vital savings, when invested by prudent private bankers, become capital—the life-blood of capitalism. Bankers direct these funds towards those businesses that are best at satisfying consumer needs—and more and more capital is accumulated. All this capital, when invested in machinery, becomes available for capital-less poor workers, who then use these machines to improve their productivity—the only way by which we can permanently increase workers’ wages and also achieve lasting growth. And let us not forget the all-important civilization that we will foster, not destroy.

The only way, then, by which we can achieve all these extremely worthy goals, worthy not only in our individual interests, but also in the interests of the commonwealth, is by denationalizing money. Capitalism must mean private money, private capital and private control over this capital.

Private money is but whatever the common people are willing to accept in their day-to-day transactions. It is safe to predict that if fiat paper were abolished, the common people would revert to gold and silver. All these hoards of gold and silver will then be private hoards, private capital, private money. If collective action is required to manufacture standardized coins, these official mints will be converting private stocks of gold and silver into coins. Even in the performance of this task, the state should be offered nothing but its modest seignorage, with no role in establishing a fixed rate of exchange between gold and silver. All prices, including those of gold and silver, must be freely determined. That is capitalism.

We must also look at the huge political gains our society will achieve through the denationalization of money. In one fell swoop, we will inform all public functionaries that “the party is over”. Their budgets will be strictly limited to their tax revenues, and they will be unable to fund purely political programmes —from subsidies to income transfers to welfare spending all the way to Air India, wars and the secret services of the state. The most direct benefit of this will be a severe curtailment of “state politics” itself, a pernicious activity directly linked to the proliferation of “tax parasites”. Such a phenomenon is a blatant contradiction of traditional conceptions of “representative democracy”, which always meant representation of the taxpayer. As many classical liberals pointed out through the 20th century, as the Western welfare-warfare state expands and continues expanding, it is the system of fiat paper money that is ultimately responsible for turning all democratic institutions into representatives of those who receive money from state budgets. Thus, there is lot at stake in the denationalization of money. There is civilization, capitalism, and even democracy.

As an Indian economist, I hold that practising this pure form of capitalism is the only way of improving the lot of our poor—whom the constantly depreciating fiat paper money system sucks dry of all their capital while central planners feign concern for them. Their only hopes lie in exactly the same set of liberties that billionaires will thrive under. They need freedom, free markets and free trade. They need to earn, to save, and to invest their savings—under their own direction. In capitalism, all such actions are speculative. I advocate letting our poor people speculate with their own money rather than hand all their savings to state authority. It is indeed this idea that has failed— most spectacularly in the US, once considered a bastion of capitalism.

I was recently asked: “How do we get from here to there?” My contribution to these deliberations must be limited to pointing out where “there” ought to lie. I trust I have succeeded in my objective.

Sauvik Chakraverti is an author and columnist. He blogs at sauvik-antidote.blogspot.com Comments are welcome at theirview@livemint.com

Dialling up India’s growth

R. Sivakumar — Mon, 02 Nov 2009 16:28:00 GMT

Slogans have captured India’s collective imagination in the past. We had Indira Gandhi’s “roti, kapda aur makaan” (food, clothing and shelter) in the 1970s and, more recently, “sadak, bijli aur paani” (roads, power and water) in the 1990s. We now need a new canon, “cellphone, Internet aur growth”, for the next phase of development. Admittedly, this doesn’t have the same desi ring that the previous two possess, but that is perhaps metaphorically appropriate for an India that is globalizing on its own terms. It is a slogan that will remind Indians just how much mobile and Internet penetration can contribute to our gross domestic product (GDP) and the growth of our country.

By any measure, the progress made in driving cellphone penetration has been stunning. We have gone from a million subscribers in 1999 to nearly 450 million today— 45,000% growth in a decade! The challenge for cellular voice connectivity is rural density, with penetration at an impressive 75% in urban areas, but only 12% in rural India. Greater mobile penetration will translate into more rural empowerment and increased efficiency to the rural economy. Farmers, for instance, can communicate with commodity buyers or brokers.

Stockxpert

Every 10% increase in connectivity leads to a 0.61% increase in GDP, as McKinsey noted in 2008. Yet, we still need to improve the coverage and quality of the voice networks and grow the rural subscriber base as dramatically as its urban counterpart. There are a number of policy, service and pricing innovations that can make this a reality.

Given current momentum and focus, both from the government and industry, ubiquitous voice connectivity in the country could be considered a “done deal” during the course of the next four-five years. For all practical purposes, India will be saturated on phone connectivity, with all the attendant benefits of voice communication accruing to the economy. McKinsey calculates that for every 10 million connected via voice (cellphones), there is a positive impact of $1 billion on GDP; while for every 100 million connected via the Internet, there is a $40 billion GDP impact.

Cellphones have already provided an important leapfrog to India. We skipped the fixed-line generation altogether. The net impact was with a much lower investment; India was privy to new technology and pervasive phone connectivity. This happened because we embraced worldwide standards in mobile communication, deployed the latest technology and made it available to all—in other words, we played to our strength in large numbers to bring down costs. India now needs to ensure similar thinking with the Internet. Adopt worldwide standards of definition of broadband (a road map to at least 10 megabits per second, or Mbps, for all), deploy the latest technology (Wimax, or worldwide interoperability for microwave access) and make it available to all.

The next big challenge for the country is to get every Indian connected on a “real” broadband connection—that is, one that offers at least 2 Mbps. Most countries that have taken a lead in building broadband infrastructure define true broadband connections at speeds of at least 10 Mbps. In India, after much debate, we have finally moved the dial from 256 kilobits per second (Kbps) to 2 Mbps. There is still a degree of schizophrenia in the debate since broadband is still viewed as an elitist luxury for the urban middle class. We need to make a clear break from such thinking.

The deployment of a ubiquitous broadband network will actually disproportionately advantage those sections of society that have been otherwise denied the benefits of information and education.

Broadband will find application in a wide range of development activities. As the government aims to migrate National Rural Employment Guarantee Scheme (NREGS) registrants from an unskilled to a semi-skilled (and eventually to a fully skilled) workforce, broadband-enabled community service centres can serve as a key delivery platform. Providing basic healthcare and harnessing the promise of telemedicine can only be made a reality with access to a very high speed data network.

A 2006 study by the Confederation of Indian Industry (CII) had shown that pervasive availability of broadband can add 65 million new jobs and $180 billion to the Indian economy. In today’s scenario, this estimate might be proven conservative: We have the capability to scale this up, given that India has been spending only around 7% of GDP towards information and communication technology (ICT). Increasing this investment to 10% of GDP would deliver an incremental $35 billion per year over the next five years.

However, getting this process right will involve necessary steps such as increasing ICT deployment; mandating the deep use of ICT in key sectors such as education, healthcare and national security; and migrating all government revenue and non-revenue services to an online platform. ICT has to be viewed as a core infrastructure investment and should be an integral part of how we think about physical infrastructure, education and healthcare. We need to think of physical infrastructure as steel plus cement plus ICT; education as classrooms plus teachers plus ICT; healthcare as doctors plus patients plus ICT. This will make the new canon of “cellphone, Internet aur growth” a welcome reality.

R. Sivakumar is managing director, sales and marketing group, Intel South Asia. Comments are welcome at theirview@livemint.com

Organizing a complex system

Arun Maira — Sun, 01 Nov 2009 14:29:00 GMT

What do the Commonwealth Games in Delhi have in common with the Integrated Child Development Scheme (ICDS)? A problem of organization. And a problem of implementation. Preparations for the Games in Delhi have slipped behind schedules. The international Commonwealth Games Organization has proposed to install its own monitor in Delhi to oversee progress. The country has been embarrassed. The ICDS is a long-running scheme in the country, and perhaps the largest programme in the world focused on the care of children. However, results are not proportionate with efforts and expenditures. Malnutrition continues to hover at around 45% of India’s children—one of the highest levels in the world, in spite of the country’s overall economic progress and reduction of poverty levels.

Illustration: Jayachandran / Mint

Problems of organization and implementation extend to other areas, too. The country must progress much faster towards its human development goals. It is not for lack of trying. For every problem there is a scheme, often massively funded: the National Rural Employment Guarantee Scheme, the Jawaharlal Nehru National Urban Renewal Mission, the Rajiv Awas Yojana, etc. Most major schemes to address national problems are “central schemes” so that solutions can be properly managed (and adequately funded) by the Centre rather than leaving them to the states, where, it is feared, they will not be well managed. However, the states have essential roles in the implementation of even “central” schemes, and therefore the Centre’s problem is to get the states to perform.

Problems of coordination and control of large programmes that involve many agencies beset large multinational corporations, too. A survey of 2,000 chief executive officers and executives of multinational corporations around the world revealed that the principal organizational challenge they faced was “coordination”. They wanted less “centralization”, so that appropriate solutions could be found locally. They also wanted less “decentralization”: to avoid duplication of efforts and improve efficiency. “Think local, act global”, or the other way round, “Think global, act local”, were the mantras they were repeating. What they wanted were practical concepts and tools to manage their organizations accordingly.

The country must devolve power to the states and local bodies. And it must ensure implementation of change across the nation in many areas as mentioned before—education, health, water management, local entrepreneurship, urban renewal, etc. With pressure to produce results, schemes multiply and organizations, too. Then a central coordinating agency is appointed, which turns out to be not sufficiently effective. So another monitoring agency is appointed. Soon several such agencies for coordinating and monitoring must be coordinated! Thus money and time is wasted in coordination without much impact on implementation on the ground. Therefore, like business corporations, national programmes require better concepts of organization and tools for effective coordination. Let us examine what these may be.

• A new organizational architecture

An analysis of prevalent “theories-in-use” of how to organize a complex system reveals two dominant theories: “hierarchies” and “markets”. In fact, these are the two alternatives described by Oliver Williamson, winner of the Nobel Prize in economics this year. These are also the two alternatives that executives imagine. Hence their dilemma: they want less “centralization”, which requires a hierarchy that they fear could stifle innovation; but they also want less “decentralization”, which would open up an internal market for ideas and resources no doubt, but one they fear they may not be able to control.

However, markets and hierarchies are not the only fundamental forms for organizational architecture. There is a third, which operates in natural systems. Imagine a tropical forest, humming with a variety of life. It is not an unformed chaotic system: It has a rhythm to it. Ask yourself: “Who is in charge of this complex system?” It is not obvious who is, yet it functions very well. A study of the organizational architecture of such “complex, self-adaptive systems” in nature and elsewhere (such as the Internet) reveals the principles for designing organizations that can remain on the creative edge between a stifling hierarchy (and bureaucracy) on one side and unorganized confusion on the other. (Interested readers can find an explanation of these principles in my book: Shaping the Future: Aspirational Leadership in India and Beyond, John Wiley and Sons.)

• Lateral linking organizations

An essential feature of such organizations is the strength and quality of the “lateral linking organizations” within them. The traditional organization concentrates most of its energy in specifying its vertical structures—hierarchies, allocations of authority, reports up and instructions down. But lateral links across the organization are not deliberately designed with similar attention. They are left to be shaped by informal market forces and political alignments within the organization. Hence they are often weak or inappropriate. In this vertical view of organization, a need for coordination is met by appointing an authority above those who must be coordinated to whom they must all report. Thus, weaknesses in the lateral structures are addressed with more vertical structures—more authorities, more monitors and more controls, which crowd the space for movement and creativity within the organization.

Lateral linking structures are designed to facilitate and strengthen collaboration among the many agencies who must work together, rather than imposing one more “boss” over them to force them to coordinate. These mutually supportive mechanisms are abundant in natural systems, such as the tropical forest. Such mechanisms operate in large, international consulting companies and in the Tata group, too. International consulting companies have fiercely individualist partners. Each is measured and rewarded for performance so internal competition can be high. However, they are brought together in lateral linking “practices”, in which they share ideas, learn from each other, form teams to pursue new ideas and serve clients.

The Tata group has an unusual structure. It consists of many dozens of independent companies in diverse businesses, with separate shareholders, and their own boards. Yet they cooperate in many matters to their mutual benefit. They learn from each other. They adopt standards they all wish to uphold. They share a culture and values. A lateral mechanism that links them is an evolving business excellence framework in which the companies participate. Through this framework they share experiences and best practices, evaluate each other and distil standards they will adopt. It is a good example of how one coordinated organization can be formed from many independent entities over which the centre exercises limited command-and-control authority.

Business groups, such as the Tatas, and international consulting companies, may share some characteristics with federal countries. However, their scales and complexities are lesser. Therefore, scepticism about the transportability of principles from one to the other is expected. (On the other hand, one could argue that nature, where these principles work, is even more complex.) Fortunately, support for these ideas now comes from other sources, too. Elinor Ostrom, who won the Noble Prize in economics this year with Williamson, has shown that large human communities that do not leave it to the market alone can coordinate their own actions without a hierarchy to govern them, and produce better outcomes for all.

• A new model of a leader

An examination of how such organizations work reveals the essential role of leaders within them. What is critical is the type of leaders they have. A widely prevalent model of leadership, reinforced by stories, myths and stereotypes, is that a leader must be tough and strong. In this version, he (the popular image of a leader is generally a man) has authority granted to him over others so that he can lead them, whereas lateral organizations require that leadership is exercised without the leader being designated the “boss”. In such organizations, leadership is earned by the ability to influence others to cooperate. The way women often make family members cooperate could be a more appropriate model. Indeed, one should apply insights into our organizations from the way the feminine force binds and sustains nature.

India is a diverse country, with a federal structure, and an ongoing process of devolution of power away from the Centre. At the same time, it needs much faster implementation of changes across the nation with much better coordination of action. It cannot impose a hierarchy. Nor can it leave it to the market. Therefore India, more than any other country in the world, must systematically master these new theories of organization and leadership.

Arun Maira is a member of the Planning Commission. Comment at theirview@livemint.com

The question of open source

Rahul De — Thu, 29 Oct 2009 17:41:00 GMT

Open source software poses a seemingly uninteresting question: Should we have access to the source code of software that we use? One simple response is that we have the software and it does its job. So why bother? That answer works at a certain utilitarian level, we have what we paid for and so do not have to bother about how it works and how it was made. And because it does its job, we are further distanced from bothering about source code—not all of us are computer scientists and know much about software and how it is written.

However, I believe access to source code and the nature of software is an important issue for India. Open source software is poised to have a deep impact on our economy and change, forever, the way we view software and other products of human intellectual activity.

Photo: Stockxpert

Programmers create software by writing code in a human readable language, such as Java or C, which is then compiled and converted into a long string of ones and zeros that can be understood by the processor of a computer. The code that is used to create the compiled software is known as the source and for a typical software, such as a word processor, consists of millions of lines of code.

Firms that make and sell software typically sell only the machine-readable ones and zeros and do not give away the source. Without source code, it is impossible to see the program or make any changes to it. Open source software, on the other hand, explicitly makes the source code available to anyone who wants to see or modify it.

But the more important aspect of open source software is the fact that it is “free”. This freedom follows from the nature of the licence (called the GNU general public licence, or GPL) that open source software is typically distributed with—the licence allows you to use and see the software, modify it at will, and redistribute to whomsoever you want.

Free software is a philosophy of sharing that espouses collaborative creation and free and open dissemination of intellectual activity. Programmers from around the world collaborate to create free software and GPL licence ensures that their efforts remain forever in the public domain.

Free and open source software has an economic aspect: It is free of cost—anyone can download the software from websites. Some firms sell free software too, but they do so by providing special benefits such as support and customization. Personal computers are often used to run applications such as word processors, email, Internet browsers, etc. All these applications have free equivalents that are of very high quality. For instance, Linux, the free operating system is a direct competitor to Microsoft Windows. Similarly, the Open Office software is a free competitor to Microsoft Office.

In a recent study, I found that many large commercial organizations, government departments, small firms and education institutions have started using free software on desktops and on servers. Life Insurance Corp. of India, for example, runs around 18,000 desktops on free software, as also thousands of servers. While doing so they are saving crores of rupees in licensing costs. The IT@School project of Kerala put free software on 50,000 desktops in schools across the state and saved many crores of rupees. Smaller firms shaved off many lakhs of rupees from their IT (information technology) budgets by switching to free software.

If, in 2010, about half the personal computers sold in India come with free software instead of the proprietary software they are bundled with right now, the savings for India as a whole could be around Rs10,000 crore. And this is a conservative estimate.

The economic benefit, though, is only part of the story. The other part is the intangible benefits free software provides. With free software, organizations can experiment and tinker with software before adopting it; free software is available easily and updated rapidly, so organizations can always access the latest technology; they are not driven by vendors for their software choices (as is the case most of the time); and they can restrict the use of pirated software in their organizations.

Free software embodies the values of learning, sharing and open collaboration that have been the basis of knowledge creation throughout history. In Kerala, hundreds of thousands of children are not only learning with high-quality software but also are indirectly imbibing the values of sharing and openness that the software is built with. In this manner, free software promotes the highest values of human culture: that the hard work put into creating hundreds of millions of lines of software code is not meant entirely for private profit but for the benefit of people around the world.

I return to the question I started with: Should we have access to the source code of software that we use? The answer is an unequivocal: yes, we should. Free and open source software represents openness, sharing, and a culture of learning and enquiry. It invites us to understand, build upon, and advance the software tools needed for our community. It presents an infinite potential for innovation and discovery, and a challenge to our youth to stand on the shoulders of giants to build software and tools for the future.

Rahul De is Hewlett-Packard chair professor of quantitative methods and information systems area at the Indian Institute of Management, Bangalore. Comment at theirview@livemint.com

The death-defying dollar

Barry Eichengreen — Wed, 28 Oct 2009 14:49:00 GMT

The blogosphere is abuzz with reports of the dollar’s looming demise. The greenback has fallen against the euro by nearly 15% since the beginning of the summer. Central banks have reportedly slowed their accumulation of dollars in favour of other currencies. One sensational if undocumented story has the Gulf states conspiring with China, Russia, Japan and France—now there’s an odd coalition for you—to shift the pricing of oil away from dollars.

StockXpert

Economists have no trouble explaining the dollar’s weakness after the fact. With US households saving more in order to rebuild their retirement accounts, the country has to export more. A weaker dollar is needed to make American goods more attractive to foreign consumers.

Moreover, disenchantment with the sophisticated instruments that its financial institutions specialize in originating and distributing means more limited foreign capital flows into the US. Fewer foreign purchases of US assets again imply a weaker dollar. Extrapolating the past into the future, forecasters predict that the dollar will decline further.

The first thing to say about this is that one should be sceptical about economists’ predictions, especially those concerning the near term. Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months.

I should know. When the sub-prime crisis erupted in early September 2007, I published an article entitled “Why Now is a Good Time to Sell the Dollar” in a prominent financial publication. What happened next, of course, was that the dollar strengthened sharply, as investors, desperate for liquidity, fled to US treasury securities. Subsequently, the dollar did decline. But then it shot up again following the failure of Bear Stearns and the problems with AIG.

Over periods of several years, our models do better. Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness.

The question is, weakness against what? Not against the euro, which is already expensive and is the currency of an economy with banking and structural problems that are even more serious than those of the US. Not against the yen, which is the currency of an economy that refuses to grow.

Thus, for the dollar to depreciate further, it will have to depreciate against the currencies of China and other emerging markets. Their intervention in recent weeks shows a reluctance to let this happen. But their choice boils down to buying US dollars or buying US goods. The first option is a losing proposition.

In the longer run, Organization of the Petroleum Exporting Countries will shift to pricing petroleum in a basket of currencies. It sells its oil to the US, Europe, Japan and emerging markets alike. It hardly makes sense for it to denominate oil prices in the currency of only one of its customers. And central banks, when deciding what to hold as reserves, will surely put somewhat fewer of their eggs in the dollar basket.

Beyond this, the dollar isn’t going anywhere. It is not about to be replaced by the euro or the yen, given that both Europe and Japan have serious economic problems of their own. The renminbi is coming, but not before 2020, by which time Shanghai will have become a first-class international financial centre. And, even then, the renminbi will presumably share the international stage with the dollar, not replace it.

The one thing that could precipitate the demise of the dollar would be reckless economic mismanagement in the US. One popular scenario is chronic inflation. But this is implausible. Once the episode of zero interest rates ends, the Federal Reserve will be anxious to reassert its commitment to price stability. There may be a temptation to inflate away debt held by foreigners, but the fact is that the majority of US debt is held by Americans, who would constitute a strong constituency opposing the policy.

The other scenario is that US budget deficits continue to run out of control. Predictions of outright default are far-fetched. But high debts will mean high taxes. The combination of loose fiscal policy and tight monetary policy will mean high interest rates, sluggish investment and slow growth. Foreigners—and residents—might well grow disenchanted with the currency of an economy with these characteristics.

Mark Twain, the 19th-century American author and humorist, once responded to accounts of his ill health by writing that “reports of my death are greatly exaggerated”. He might have been speaking about the dollar. For the moment, the patient is stable, external symptoms notwithstanding. But there will be grounds for worry if he doesn’t commit to a healthier lifestyle.

Barry Eichengreen is professor of economics and political science at University of California, Berkeley. Comments are welcome at theirview@livemint.com

Reserve Bank’s balancing act

Renu Kohli — Tue, 27 Oct 2009 16:10:00 GMT

This mid-term review—October 2009—of monetary policy was perhaps one of the most difficult in recent times. Not only did the Reserve Bank of India (RBI) have to weigh the inflation growth trade-off, but it also had to take a call on exiting some of its crisis-level monetary support measures. Central to this jugglery were the persistent food price pressures, excess liquidity alongside rising stock prices, a disparate conjunction of the real-financial linkages and a yet-to-emerge, even revival of aggregate demand. In pairing these risks, both economic uncertainty and political economy have prevented RBI from taking the big step, i.e., reversing the interest rate regime, but it would have been uncharacteristic to have ignored price stability altogether. A tactful balancing, therefore, has played out in the arena of “extraordinary” monetary support; this is a subtle egress to signal inflationary concerns without disturbing the nascent growth momentum.

Paradoxically, it is doubtful if the outcome of the review could have been any different.

Illustration: Jayachandran / Mint

With a concerted, counter-cyclical fiscal monetary push having been used for the first time by Indian policymakers, it was doubtful that the central bank would walk away from growth at the very first signs of its revival. For the answer to the key question on the growth front—how dependent is the recovery upon monetary fiscal support, and whether it will self-perpetuate henceforth—is uncertain at this point. Demand activity indicators are mixed, even conflicting. Although manufacturing output averaged a smart 7.4% (year-on-year) in June-July against the 1.1% average for January-May, the easy monetary conditions have not yet translated into a surge in bank lending, indicating both weak economic activity and high costs. Labour market movements—the tightening of which would help confirm a self-sustaining recovery—are also unclear: They are improving in sectors such as auto, cement and, to an extent, in some service industries, but are nebulous across the board.

Add to this economic uncertainty the fact that the government’s fiscal expansion is still in motion, to which the central bank is committed. In balancing the risks, the central bank is preparing to change track, laying out the ground, but its commitment to demand support—through maintaining a low-interest rate environment—has taken precedence.

That said, a very hawkish tone signals that the monetary stance has now reversed; the weights have dominantly and firmly been placed upon price stability, and the growth objective has been relegated to the next order.

What helped RBI on the price stability front is the expected seasonal moderation in food prices with fresh arrivals of winter supplies, as well as the relatively low spillover risk of a generalized price increase in the absence of demand-side pressures—with a negative output gap, 0.4%, growth is well below trend. While RBI is worried about the trending up of headline inflation, the dominant presence of supply-side pressures afforded it some policy space at this juncture; at present, it could confine the use of monetary policy to prevent inflationary expectations from becoming embedded. As a clear picture of some liquidity indicators has emerged—the completion of three-fourths of the government borrowing by the first half of the year, a low credit offtake and the resumption of non-bank funding sources—RBI can manage liquidity levels to balance prices and genuine credit needs without fearing crowding out or not providing monetary accommodation to fiscal policy. Combined with distinctly hawkish communication, RBI can cheerfully address inflationary risks for now with these measures.

The central bank’s second worry was the incongruous divergence emerging between the crisis-time monetary measures and the post-crisis economic reality. There were the “extraordinary” monetary support facilities coexisting with excess liquidity bordering on Rs1.2 trillion daily, a stock market recovery that almost doubled in the last six months, foreign capital pouring into the country due to its improving growth outlook, real economic indicators looking more normal than below-trend, and upbeat optimism all around. Clearly, the situation was becoming embarrassing. So a gentle beginning has been made by legitimizing some hard facts: RBI is restoring the statutory liquidity ratio to its mandated 25% (lowered to 24% in November) when banks are voluntarily holding close to 30%, and it is bringing forward the end of some crisis-time funding facilities that were not of much use anyway. This is more signalling than real impact.

As RBI’s preferred combination is to set in motion an exit through the withdrawal of some now superfluous monetary support measures and a more active liquidity management, the next logical step would be to restrict open market operations. Indeed, there have already been some signals to this effect. For instance, RBI restricted its outright purchases in traditional government securities to Rs57,500 crore in the first half of 2009-10, against the scheduled Rs80,000 crore announced in March; and it has reserved its options for the second half, too, by not specifying any amount while announcing the government borrowing calendar. It also scaled back its open-market operations in September by keeping its stock of market stabilization bonds unchanged from August levels (Rs18,800 crore), offsetting the liquidity impact of rising Union government surplus funds held at RBI.

Looking ahead, though no road map for the exit is laid out, it’s clear that unconventional measures will be wound up sooner than later, followed by the more conventional tools such as reversal of the cash reserve ratio and interest rate hikes.

Renu Kohli was, until recently, with IMF. Comments are welcome at theirview@livemint.com